Question 1

Bonds that have been downgraded can fall into a group described as ________.

Accepted Answer

Bonds that have been downgraded are those that are considered to be of lower credit quality or higher risk. This may be due to a variety of reasons such as a deterioration in the issuer's financial position or a downgrade of the overall credit rating. One of the reasons for bond downgrades is if the issuer significantly increased their debt as a result of a leveraged buyout or a recapitalization. Therefore, option C is the correct answer. Option A relates to a downgrade due to a decrease in debt, which is unlikely. Option B relates to an upgrade due to an increase in debt, which is not what the question is asking. Option D is not a valid option.

Question 2

In regards to adjustable-rate preferred stock, which of the below statements are FALSE?

Accepted Answer

D

Question 3

Preferred stock, particularly cumulative preferred stock, has some important similarities with debt including: ________.

Accepted Answer

Preferred stock, particularly cumulative preferred stock, promises fixed cash payments to preferred stockholders. This is similar to debt as debt also promises fixed cash payments to creditors. Choices A and B are incorrect as they do not reflect this similarity. Choice D is partially correct but does not fully capture the similarities between preferred stock and debt.

Question 4

Historically, there have been issues entitling the preferred stockholder to participate in earnings distribution beyond the specified amount (based on some formula). Preferred stock with this feature is referred to as ________.

Accepted Answer

Participating preferred stock entitles the holder to participate in the distribution of earnings beyond the specified amount. Redeemable preferred stock can be redeemed by the issuer at a certain time or price. Convertible preferred stock can be converted into common stock at the option of the holder. Cumulative preferred stock entitles the holder to accumulate unpaid dividends for future payment.

Question 5

Most corporate bonds are ________; that is, they run for a term of years, and then ________.

Accepted Answer

Most corporate bonds are term bonds, meaning they run for a specific term or period of time, and then become due and payable, meaning the principal amount and any remaining interest must be paid back to bondholders. Choice A is incorrect as sinkable bonds are rare and not commonly used. Choice B is incorrect as balloon bonds involve making smaller payments throughout the bond term, with a larger payment due at the end of the term. Choice D is incorrect as becoming due and not payable would mean the bondholders do not receive their principal back at maturity, which is rare for corporate bonds.

Question 6

The preferred stock ________.

Accepted Answer

The statement "has historically been issued largely by utilities, accounting for more than half of each year's issuance" is correct. Thus, only option B is the correct answer. Option A is incorrect as preferred stock is not a large part of the financial system in terms of a source of new financing. Option C is incorrect as young growth companies primarily issue common stock rather than preferred stock. Option D is incorrect as only option B is correct.

Question 7

The four general classifications used by bond information services are: ________.

Accepted Answer

The four general classifications used by bond information services are utilities, transportations, industrial, and banks and finance companies. Option A is incorrect because bank holding companies are included in the fourth classification of banks and finance companies, and commerce is not a classification used by bond information services. Option B is incorrect because electricals is not a classification used by bond information services. Option D is incorrect because financials is not a classification used by bond information services, and the correct classification should be banks and finance companies.

Question 8

Which of the below statements is FALSE?

Accepted Answer

Refunding does not prohibit early redemption for any reason, but rather allows the issuer to refinance the bonds at a lower interest rate to save costs. The other statements are true: guaranteed bonds are backed by another entity, most corporate issues have a call provision, and callable corporate bonds are generally callable at a premium that declines over time.

Question 9

Which of the below statements is FALSE?

Accepted Answer

The statement that a corporate trustee has officers who are amateurs in performing the functions of a trustee is false. A corporate trustee is a professional institution that acts as a trustee for bondholders and other stakeholders, and its staff are typically experienced and knowledgeable in the field of trust administration.

Question 10

Which of the below statements is TRUE?

Accepted Answer

Each rating agency periodically publishes a table showing the upgrade and downgrade history of the issues that it rated. This helps investors and market participants to track the historical performance of the securities and the accuracy of the rating agencies' assessments. Option A is partially correct but incomplete. Option B is false, as the highest grade bonds are designated by the symbol Aaa or AAA. Option C is also partially correct, but unexpected changes in the issuer's ability to make payments are not always related to accidents or regulation.

Question 11

High-yield bonds ________.

Accepted Answer

High-yield bonds, also known as junk bonds, are issues with a credit rating below triple B. These bonds have a higher risk of default and therefore offer higher yields to compensate investors for the increased risk.

Question 12

Which of the below statements is FALSE?

Accepted Answer

A callable bond grants the issuer, not the bondholder, the right to call or redeem the bond prior to its maturity at a specified price called the call price. The bondholder has no right to sell the issue back to the issuer at par value on designated dates.

Question 13

The ________ does not attempt to precisely predict a given level of recovery, but rather offer ratings that are in the form of an ordinal scale.

Accepted Answer

The statement specifically mentions a "recovery rating system" that offers ratings in the form of an ordinal scale. None of the other choices match this description.

Question 14

________ companies can be divided into airlines, railroads, and trucking companies.

Accepted Answer

The word "transportation" in the question suggests that the companies being referred to are involved in the movement of goods or people from one place to another, making option B ("Transportations") the best choice. The three specific types of companies mentioned (airlines, railroads, and trucking companies) all fall under the broader category of transportation companies. Options A, C, and D are not relevant to the classification of these types of companies.

Question 15

Features of a corporate bond include ________.

Accepted Answer

Corporate bonds are legal obligations. If the issuer fails to pay either the principal or interest when due, it constitutes legal default. Bondholders can then initiate court proceedings to enforce the contract. Options A, C, and D contain inaccuracies regarding the nature of corporate bonds and their payment structures.

Question 16

Which of the below statements is TRUE?

Accepted Answer

A debenture bond is not secured by a specific pledge of property, but it can still have a claim on the property or earnings of the issuer. Options A and B are incorrect as they describe different types of securities, while option C does not provide enough information to determine its accuracy.

Question 17

________ is a class of stock, not a debt instrument, but it shares characteristics of both common stock and debt.

Accepted Answer

Preferred stock is a type of stock that shares characteristics of both common stock and debt instruments. It typically provides dividends before common stock and has priority over common stock in the event of liquidation, but it does not have the voting rights that common stock does.

Question 18

A provision in the tax code exempts ________ from federal income taxation, if the recipient is a qualified corporation.

Accepted Answer

The tax code allows for a dividends-received deduction, which for many years allowed corporations to exclude 70% of the income from dividends received from other U.S. corporations from their taxable income, assuming the dividends are from a qualified corporation. This provision is designed to mitigate the effects of double taxation on corporate income.

Question 19

One of the four general classifications used by bond information includes the class called "utilities," which can be further broken down into ________.

Accepted Answer

The class of "utilities" includes electric power companies, gas distribution companies, water companies, and communication companies.

Question 20

Which of the below is NOT one of the three types of preferred stock?

Accepted Answer

Exchangeable and cumulative preferred stock is not a single type of preferred stock. Cumulative preferred stock is a type where missed dividend payments are accumulated and must be paid out before dividends can be paid to common stockholders. Exchangeable preferred stock is another type that can be exchanged for another type of security. These are not combined into one type as the question suggests.

Quiz 20: Markets for Corporate Senior Instruments: II

Bonds that have been downgraded can fall into a group described as ________.

In regards to adjustable-rate preferred stock, which of the below statements are FALSE?

Preferred stock, particularly cumulative preferred stock, has some important similarities with debt including: ________.

Historically, there have been issues entitling the preferred stockholder to participate in earnings distribution beyond the specified amount (based on some formula) . Preferred stock with this feature is referred to as ________.

Most corporate bonds are ; that is, they run for a term of years, and then .

The preferred stock ________.

The four general classifications used by bond information services are: ________.

Which of the below statements is FALSE?

Which of the below statements is FALSE?

Which of the below statements is TRUE?

High-yield bonds ________.

Which of the below statements is FALSE?

The ________ does not attempt to precisely predict a given level of recovery, but rather offer ratings that are in the form of an ordinal scale.

________ companies can be divided into airlines, railroads, and trucking companies.

Features of a corporate bond include ________.

Which of the below statements is TRUE?

________ is a class of stock, not a debt instrument, but it shares characteristics of both common stock and debt.

A provision in the tax code exempts ________ from federal income taxation, if the recipient is a qualified corporation.

One of the four general classifications used by bond information includes the class called "utilities," which can be further broken down into ________.

Which of the below is NOT one of the three types of preferred stock?